This month I have had several run-ins with something called a “Quit Claim Deed”.
I have had a closing where the seller/investor was used to using a Quit Claim Deed for his house purchases. At the closing table, he could not understand why he was being charged $900 for property taxes. This is traditional in Indiana. You see, when you pay your property tax bill this year, you are paying property taxes for last year. The May payment for this year pays for the first 6 months of last year. The November payment this year pays for the last 6 months of last year. When you sell a house, the buyer takes over the property tax payments, but they are paying for last year when they did not own the property. To reconcile this at closing, the seller is debited, and the buyer is credited with the amount of property tax that the seller is responsible for. This makes the buyer whole and not out paying the seller’s property tax bill.
This seller was used to having one document at closing that gave the buyer’s and seller’s name, the amount, and the legal description. There was no consideration for property taxes. It means that because he used Quit Claim Deeds in the past, he ended up paying the seller’s property taxes for a year. The closer, the buyer, and I tried to explain this to him, and we failed. For the following week, he hounded the three of us for his money.
This week, a longtime client of mine asked me about a Quit Claim Deed that his sister used to buy a house years ago. He was unfamiliar with it and wanted to know the in and outs of it. So, I decided to put together the following chart and explain it to him.
All title company closings are insured. Unlike other insurance which protects you from issues in the future, title company insurance protects you from issues that occurred in the past.
The boxes on the left side of the picture show some of the things that the title company researches.
• Property tax records – title companies pro-rate taxes daily. This amount gets debited to the seller and credited to the buyer. Changing the closing date can change these amounts.
• Research of title – the process of retrieving documents evidencing events in the history of a piece of real property, to determine relevant interests in and regulations concerning that property.
• Liens – A check on all the recorded liens on a property. These would have to be cleared in advance or at closing.
• Clouds on title – A cloud on title or title defect is any irregularity in the chain of title of the property that would give a reasonable person pause before accepting a conveyance of title.
• Homeowner association – Make sure that all dues are paid and up to date and what the monthly or quarterly or yearly fees are.
• Lender – If the seller has a mortgage on the property, the title company must get a pay-off amount. This will be paid to the lender after the closing.
Here is the major difference between a General Warranty Deed (Traditionally used) closing and a Quitclaim Deed closing. In the picture, there is a dotted red line box. This red box is the only thing involved in a Quitclaim Deed closing along with one document that shows a cash amount, names of buyer and seller, and the legal description of the property. After the two parties sign, the document must be recorded.
Basically, it is an uninsured closing. There are no protections in a Quitclaim Deed. Here is what could happen after the fact.
• Maybe the seller did not own the property.
• Maybe the seller had partial ownership.
• Maybe there were past property taxes owed on the property.
• Maybe there was a cloud on the title.
• Maybe there was a contractor lien on the property.
• Maybe there was $1000’s owed to the homeowners association.
If the Quitclaim Deed was executed properly, the new owner is now responsible for the above issues.
Yes, it is a lot cheaper to do a Quitclaim Deed transaction if you are willing to roll the dice and take the risk.
A new homeowner wants peace of mind and is usually willing to pay for it.